Beyond the first mile: where your Internet comes from

Submarine plough used to lay cables
Submarine plough used to lay cables

Today’s post is written by Rudolf Van der Berg of the OECD’s Science, Technology and Industry Directorate

In 2012 the only submarine fibre optic cable that then connected Benin with global telecommunication networks and the Internet was cut for two weeks. International payments were not possible and the equivalent of 150,000 weekly salaries were not available in a country of 10 million people. The influence was particularly severe because most servers are located outside the country due to a lack of data centres and local-hosting facilities. Though similar cable cuts happen on average twice a week, their effects are generally less. This is due to the fact that most countries are connected to multiple submarine fibre-cables, connect overland to neighbouring countries, and have domestic data centres.

In OECD countries, networks look like a mesh with multiple paths that can act as each other’s backup. In developing countries, however, communication networks often resemble rivers, with small branches of regional networks delivering their traffic to a central national backbone that ends at one submarine fibre, making cable cuts a greater risk to the functioning of the economy.

A new OECD report – International cables, gateways, backhaul and IXPs – investigates developments in these networks and other essential components that are beyond a consumer’s “first mile” connection. Such networks are known as backhaul, backbone, regional, middle mile, core, trunk, or international networks. The report finds that there is still considerable investment in backbone and submarine fibre networks being made. The Baltic Sea submarine project between Finland and Germany, for example, aims to increase the operational reliability of networks in Finland, where currently traffic is routed via Sweden. In New Zealand, on the other hand, similar market initiatives to develop an alternative to the Southern Cross system, its only link to California and Australia, have not yet found the much greater commercial support that would be required.

Today, the decision to invest in a new cable can be due to a number of factors. It may, for example, be due to the need for shorter routes for high frequency trading. Here the few milliseconds gained in transmitting orders can result in a significant difference in the amounts of money earned (and in fact fibre-optic cables are too slow, so microwave networks are deployed between some stock exchanges). Nonetheless, all regions have to some extent benefited serendipitously from the initial over-investment in (inter-) regional networks between large cities during the dotcom bubble. Despite bankruptcies of the initial investors, the fibre is still present and has been bought and swapped, by telecommunication companies, cloud networks, Internet content providers and others. For example, Facebook and Google have both invested in submarine fibre projects and bought regional rings. By way of contrast, in other areas such as in many rural regions there is insufficient competition. Here, governments sometimes choose to regulate these monopolies to allow for competitive access.

Not all interventions in OECD countries, however, may be interpreted as stimulating the rollout of backhaul networks. In the United Kingdom, some believe the application of a “fibre tax” has a restrictive effect on deployment of backhaul networks. This property tax charges long distance network operators via a depreciating scale, based on the number of lit fibres (cables in use) that they have and on the length of those fibres, creating a competitive advantage for incumbents. It also requires operators to use more expensive equipment to employ multiple colours on a single fibre pair, instead of lighting unlit fibres.

It is not enough that countries are well connected through networks. The presence of data centres or other local facilities that can host Internet exchange points (IXPs) and servers is also essential. This allows local traffic to stay local. A new indicator of the number of websites under a country code top level domain name, a ccTLD such as .fr for France, hosted in the country, developed based on data provided by Pingdom, gives some insight into the functioning of the country’s hosting market. Just six OECD countries host more than half of their ccTLD domains outside that country, with Greece being the only country where two countries (Germany and the United States) host more of its ccTLD domains.

Name Hosted in Country Total Sites Sites in Country cctld
Korea 97% 1750 1693 .kr
Germany 92% 25469 23306 .de
Japan 91% 14188 12964 .jp
Czech Republic 90% 4736 4258 .cz
Hungary 84% 2619 2197 .hu
Israel 84% 1302 1088 .il
Estonia 83% 456 378 .ee
Netherlands 82% 7937 6532 .nl
Turkey 81% 2095 1693 .tr
Slovenia 78% 518 403 .si
United States 78% 2709 2100 .us
Denmark 76% 2735 2072 .dk
Finland 76% 1444 1098 .fi
France 74% 10820 8021 .fr
Iceland 72% 193 138 .is
Norway 72% 1930 1389 .no
OECD 72% 164740 118479
Poland 71% 14235 10176 .pl
Sweden 71% 3541 2522 .se
Italy 68% 8158 5513 .it
New Zealand 66% 1106 730 .nz
Australia 65% 7914 5140 .au
United Kingdom 64% 17532 11206 .uk
Switzerland 62% 2849 1755 .ch
Ireland 60% 1070 638 .ie
Slovakia 60% 1628 984 .sk
Chile 58% 1231 713 .cl
Portugal 54% 1347 729 .pt
Spain 50% 6129 3049 .es
Austria 49% 2614 1280 .at
Luxembourg 49% 174 85 .lu
Belgium 46% 2635 1213 .be
Canada 45% 4138 1873 .ca
Mexico 22% 3566 776 .mx
Greece 19% 3972 767 .gr

Econometric analysis of the extended global table, indicates that there is a strong positive correlation between the percentage of sites hosted in country and the reliability of a country’s energy network and ease of doing business in the country.

Local (blue) versus Foreign (Red) hosted content*

Foreign hosted content

Source: OECD, Pingdom, Alexa

The new OECD report also looks at the issue of local infrastructure development and costs. The lack of locally hosted content sites makes it difficult for local IXPs to continue to develop, because a market for Internet traffic exchange (peering and transit) is weak. However, in some cases it is local players that refuse to exchange traffic locally. By not peering or buying transit locally, established networks force other ISPs and content providers to buy transit from them to reach customers in that country. If networks refuse to buy transit locally from these networks, but buy it from another transit provider, the traffic will be routed via an international link out of the country, to be exchanged elsewhere with the network. Forcing networks to peer (exchange traffic without settlement) has in the past not proven to be a successful solution. In exceptional circumstances an alternative could be to force networks to buy transit locally.

Useful links

For more on Internet traffic exchange (peering and transit):

A 2014 report on “Connected television”, explains peering and transit decisions between first-mile networks and content providers.

A 2013 report on “Internet traffic exchange” explains peering and transit and shows that out of 144,000 agreements 99,5% are based on a handshake.

OECD digital economy papers

This map is included herein without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Internet traffic exchange: 2 billion users and it’s done on a handshake

That’ll be $0.0000008 for transit or 100,000 times more for voice, please

Today’s post is written by Rudolf Van der Berg of the OECD’s Science, Technology and Industry Directorate

Every day one Exabyte of data is said to travel over the Internet – enough data to fill 300,000 of the world’s biggest hard disks or 212 million DVDs. And astonishingly, according to Internet Traffic Exchange: Market Developments and Policy Challenges a new OECD report on Internet traffic exchange, most of the thousands of networks that exchange this traffic do so without a written contract or formal agreement.

The report  provides evidence that the existing Internet model works extremely well, has boosted growth and competition and brought prices for data down to 100,000 times less than that of a voice minute. A survey of 4300 networks, representing 140,000 direct exchanges of traffic, so called peerings, on the Internet, found that 99.5% of “peering agreements” were on a handshake basis, with no written contract and the exchange of data happening with no money changing hands. Moreover, in many locations, multilateral agreements are in place, using a so-called route server, where hundreds of networks will accept to exchange traffic for free with any network that joins the agreement. The parties to these agreements include not only Internet backbone, access, and content distribution networks, but also universities, NGOs, branches of government, individuals, businesses and enterprises of all sorts – a universality of the constituents of the Internet that extends far beyond the reach of any regulatory body’s influence.

These peering agreements save both parties money and improve quality for their users at the same time. The alternative is to pay third parties, so-called transit providers, which still remains necessary to reach all networks. Paying for transit currently costs between $2 and $150 per Mbit/s per month, depending on country and competition, irrespective of whether a network sends or receives it.

Under the current system, operators have an incentive to invest and expand their network to reach new peers and cooperate with other networks to establish new Internet exchange points (IXPs) in areas where there are none, because they save on transit costs. Indeed peering locations have been established in every corner of the world and large content providers and Content Distribution Networks have expanded their networks into these locations – in both developed and developing countries. This has saved them and their customers, including the ISPs they peer with and their customers, millions of dollars every year, while greatly increasing quality of service.  Expanding IXPs helps keep local traffic local, unburdens interregional links and stimulates investment in local networks. It is for this reason that the OECD has encouraged countries to develop and use IXPs for more than 15 years.

The Internet has thus developed an efficient market for connectivity based on these voluntary contractual agreements. Operating in a highly competitive environment, largely without regulation or central organisation, the Internet model of traffic exchange has produced low prices, promoted efficiency and innovation, and attracted the investment necessary to keep pace with demand.

For example, if the price of Internet transit were stated in the form of an equivalent voice minute rate, it would be about $0.0000008 per minute – or 100,000 times lower than typical voice rates. By contrast, interconnecting voice services on traditional telecommunication networks has been contentious, requiring strong regulatory oversight, with contracts between networks sometimes totaling hundreds of pages and expensive computer systems calculating the incoming and outgoing revenues.

The findings lend support to the conclusions of a June 2011 OECD High Level Meeting on the Internet Economy, which endorsed principles for Internet policy making that have since become an OECD Council Recommendation. Key among that guidance for policy makers is the need to ensure a multi-stakeholder approach to Internet policy making, and, whenever possible, avoid regulation.

The evidence gathered in Internet Traffic Exchange demonstrates that Internet traffic exchange is the archetypical example for this approach. Not only has the open model of the Internet supported two billion users in an incredibly short period of time, it also lends itself to supporting the type of innovation and competition that will drive growth for the next two billion users.  Importantly, it has done this through a mixture of multi-stakeholder participation and self-governance. The current model of Internet traffic exchange can only exist in an environment that stimulates market entry and investment.  This requires that regulators allow telecommunication and non-telecommunication operators to enter into the market, to compete and to interconnect. Indeed where development of the Internet has been less than satisfactory this often stems from a lack of sufficient liberalization.

Given the enormous difference in performance between the heavily regulated telephony sector and the performance of the Internet sector, the report says:  “As incumbent networks adopt IP technology, there is a risk of conflict between legacy pricing and regulatory models and the more efficient Internet model of traffic exchange. By drawing a “bright line” between the two models, regulatory authorities can ensure that the inefficiencies of traditional voice markets will not take hold on the Internet… That these “rules of the game” are so ubiquitous and serviceable indicates a degree of public unanimity that an external regulator would be hard-pressed to create.”

Useful links

To share best practice in this area, the OECD together with BEREC (the telecommunication regulators of the European Union area) organized two workshops on Internet traffic exchange in 2011 and 2012. Some of the presentations of these meetings can be found here.

The Relationship between Local Content, Internet Development and Access Prices (with UNESCO and ISOC)

Developments in Mobile Termination